A holding company is a parent corporation, limited liability company or limited partnership that owns enough voting stock in another company to control its policies and management. A holding company exists for the sole purpose of controlling another company, which might also be a corporation, limited partnership or limited liability company, rather than producing its own goods or services. Holding companies also exist for the purpose of owning property such as real estate, patents, trademarks, stocks and other assets. If a business is 100% owned by a holding company, it is called a wholly owned subsidiary.
One benefit of forming a holding company is that the holding company itself is protected from the losses. If one of their companies goes bankrupt, the holding company experiences a capital loss and a decline in net worth, but the bankrupt company’s debtors and creditors can’t pursue the holding company for remuneration. Thus, a major corporation might structure itself as a holding company with one subsidiary to own its brand name and trademarks, another to own its real estate, another to own its equipment and others to operate each franchise. This way, each subsidiary, as well as the holding company itself, has limited financial and legal liability. Structuring a company this way can also limit tax liability by strategically basing certain parts of the business in jurisdictions with lower tax rates.
Holding companies also allow individuals to protect their personal assets. Rather than owning assets personally and therefore being liable for their debts, potential lawsuits, and other risks, holding companies can own the assets so that only the holding company’s assets and not the individual’s assets are at risk.
A holding company’s operations consist of overseeing the companies it owns. It can hire and fire managers if necessary, but those companies’ managers are responsible for their own operations; the holding company is not. Although the holding company does not manage the day-to-day operations of the companies it controls, the owners should still understand how these their subsidiaries operate to evaluate the businesses’ performance and prospects on an ongoing basis.